New Structure for Mortgage-Backed Securities Market

Sens. Bob Corker and Mark Warner have offered a bill that takes a significant step toward developing a new structure for the mortgage-backed securities market. Not only is their bill broadly bipartisan, it also is consistent with the growing consensus on how to reform the mortgage-backed securities market.

Even a well thought out and balanced proposal is likely to have critics. In this case, the critic is Peter Wallison of the American Enterprise Institute (“The Corker-Warner Housing Reform Won’t Work,” op-ed, July 2), who claims that this bill “fosters the same loose lending that led to the housing debacle.”

This line, which he has been playing for several years, falsely blames government housing policy for the financial crisis. For one, he ignores the role of collateralized debt obligations in hiding risk that contributed to the “run” on the shadow banking system. Secondly, he conflates affordable-lending programs designed for low- and moderate-income borrowers with nontraditional mortgages such as pay-option adjustable-rate-mortgages and low-documentation “Alt-A” loans offered to affluent borrowers. Finally, he ignores the fact that loans guaranteed by Fannie Mae and Freddie Mac had lower delinquencies and losses than the loans created in the private-label (nonguaranteed) mortgage market.

The government-sponsored enterprises were required to hold less than one-half of 1% capital for their mortgage guarantees. Corker-Warner increases that amount more than 20 times. In addition, Corker-Warner has a number of other positive features such as separate mortgage-securities-issuers and mortgage guarantors from the mortgage-securitization infrastructure, and privatizes these functions. Corker-Warner also prohibits extending any form of government guarantee to non-traditional mortgages.

Clearly the Corker-Warner proposal represents a substantial improvement over the prior system and will transform the mortgage market from one of private gain and public risk to one of private risk and public gain.

Andrew Davidson

Mr. Wallison’s mistrust of Congress to not water down mortgage underwriting requirements in the future is well-founded. Instead of actually allocating funding for a favored program—for example, to build handicap-design housing for disabled veterans—and making the hard choice between cutting other spending or increasing the deficit, Congress could simply force the proposed Federal Mortgage Insurance Corporation to lower its underwriting requirements for special interests such as veterans, farmers and minorities. It is hard to imagine a healthy residential real-estate market without a government-backed secondary mortgage market in which banks and other mortgage originators can sell residential mortgages in order to roll over funds to make more mortgages; it is even harder to imagine a Congress that can actually look past the next election and not create a future systemic risk time-bomb for the financial markets.

Kenneth Kando

According to Mr. Wallison, the impetus for housing-finance legislative favoritism is attributable to the political pressure from the housing toadies: Realtors, home builders, mortgage lenders, community organizers, etc. One should also include the mortgagors who reap tax advantages from the deductibility of home interest, state and local income and property taxes, and housing/energy-related subsidies.

It is true that these benefits are probably capitalized into real-estate values, but as debtors there is a continual pressure to do something more about the high cost of housing. Aside from direct interference in local housing markets (low-income housing, rent controls, exclusionary zoning), lowering mortgage-loan eligibility criteria constitutes a natural avenue to assuage these political pressures.

In any event, housing is viewed as a tax-favored asset, with the resulting over-investment characterized by upgraded square footage mortgaged to the hilt.